Introduction to Management Science

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Presentation transcript:

Introduction to Management Science Chapter One

What is Management Science? Management Science is a “discipline” that attempts to aid managerial decision making by applying a scientific approach to managerial problems that involve quantitative factors.

Why Study Management Science? Gain an appreciation for the relevance and power of MS. Learn to recognize when MS can (and cannot) be fruitfully Applied Learn how to apply the major techniques of MS to analyze a variety or managerial problems. Develop an understanding of how to interpret the results of a MS study.

The Nature of Management Science MS is a Discipline Current Roots in 1940’s and 50’s Operations Research, OR, MS, MS/OR Simplex algorithm, Danzig (1947) MS aids managerial decision making MS uses a scientific approach

Management Science Uses a Scientific Approach Define the problem and gather data. Formulate a model (typically a mathematic model) to represent the problem. Develop a computer-based procedure for deriving solutions to the problem from the model. Test the model and refine it as needed. Apply the model to analyze the problem and develop recommendations for management. Help to implement the team’s recommendations that are adopted by management

Special Products Break-Even Analysis The Special Products Company produces expensive and unusual gifts. The latest new-product proposal is a limited edition grandfather clock. Data: If they go ahead with this product, a fixed cost of $50,000 is incurred. The variable cost is $400 per clock produced. Each clock sold would generate $900 in revenue. A sales forecast will be obtained. Question: Should they produce the clocks, and if so, how many? Slides 1.2–1.6 cover the Special Products Break-Even Analysis covered in the text, and includes many of the figures from the text.

Expressing the Problem Mathematically Decision variable: Q = Number of grandfather clocks to produce Costs: Fixed Cost = $50,000 (if Q > 0) Variable Cost = $400 Q Total Cost = 0, if Q = 0 $50,000 + $400 Q, if Q > 0 Profit: Profit = Total revenue – Total cost Profit = 0, if Q = 0 Profit = $900Q – ($50,000 + $400Q) = –$50,000 + $500Q, if Q > 0

Special Products Co. Spreadsheet Figure 1.1 A spreadsheet formulation of the Special Products Company problem.

Analysis of the Problem Figure 1.2 Break-even analysis for the Special Products Company shows that the cost line and revenue line intersect at Q = 100 clocks, so this is the break-even point for the proposed new product.

Management Science Interactive Modules Figure 1.3 A screen shot of the Break-Even Analysis module in the Interactive Management Science Modules after changing the fixed cost for the Special Products Company problem from $50,000 to $75,000. Sensitivity analysis can be performed using the Break-Even module in the Interactive Management Science Modules (available on your MS Courseware CD packaged with the text). Here we see the impact of changing the fixed cost to $75,000.

Special Products Co. Spreadsheet Figure 1.4 An expansion of the spreadsheet in Figure 1.1 that uses the solution for the mathematical model to calculate the break-even point.